[Type text]

April 12, 2011

Filed Electronically

Office of Regulations and Interpretations

Employee Benefits Security Administration

U.S. Department of Labor

200 Constitution Ave, NW

Washington DC 20210

RE: Public Hearing on Definition of Fiduciary

During the hearing on March 1 and 2, Department officials explored with several witnesses 

whether existing class exemptions, such as PTEs 75-1, 86-126 and 84-24, address witnesses concerns 

that the Department s proposal effectively would prohibit commission-based compensation. Although 

the issue did not arise on the panel on which the Institute testified, we would like to provide our views. 

We also would like to provide our views on an issue of importance to the retirement industry that 

received little time or attention at the hearing proposed exceptions for providers of investment 

platforms.

a rule that clearly and correctly draws the line between true advisory relationships and incidental 

market interactions in which plans, participants and IRA savers obtain input for their decision making 

process. That is, the rule should require individualized advice and a mutual agreement that a 

relationship of trust and confidence exists. The Department should not try to cure the lack of clarity in 

the proposal by pointing to exemptions that might provide some relief if the rule sweeps too far. For 

those situations where a true advisory relationship of trust and confidence exists, the Department 

indeed should review whether the existing exemptions will operate to provide the kinds of relief the 

Department officials asked about at the hearing. Nevertheless, we have reviewed the existing 

exemptions with the assistance of outside ERISA counsel and conclude that in light of restrictive 

interpretations by the Department of the possible exemptions, existing exemptions simply do not 

provide the clarity needed to address commenter concerns about commission-based compensation.

1. The existence of class exemptions does not relieve the Department from ensuring its 

regulation captures only true fiduciary relationships.

The Department has proposed to redefine what activities make a person a fiduciary under 

ERISA by providing investment advice. Our comment letter and testimony focused on how the 
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Department should revise the proposal to draw the right line between real advisory relationships where 

both sides understand the adviser is in a position of trust and confidence, on one hand, and ordinary 

business interactions like selling a product and providing general investment education, on the other.

Section 406(b) of ERISA prohibits a fiduciary from dealing with the assets of a plan for his own 

account, acting in a transaction involving a plan on behalf of a party whose interests are adverse to the 

plan, and receiving any consideration for his personal account from a party dealing with a plan. ERISA 

includes exemptions from these prohibitions and empowers the Department to grant additional 

administratively feasible exemptions that are in the interests and protective of plans and participants.

It is unreasonable for the Department to say that service providers should be unconcerned 

about being swept into fiduciary status when no position of trust and confidence exists or even when

it is unclear if fiduciary status applies simply because there may be a statutory or administrative 

exemption available. Rather, the Department should focus on drafting appropriate revisions to ensure 

the rule draws a clear line between fiduciary and non-fiduciary activities. Because fiduciary status 

underpins the entire ERISA compliance structure, the Department has a responsibility to keep the lines 

of demarcation clear, and should repropose the rule with appropriate revisions and seek an additional 

round of comments before finalizing any amended rule.

2. The Department should not assume that commonplace compensation arrangements 

for IRAs can continue under existing class exemptions.

The ability to maintain common compensation arrangements is critical in the IRA market, a 

market the Department did not analyze in its cost-benefit assessment. The Department cannot extend 

automatically its analysis of ERISA-governed plans to IRAs because the IRA market operates somewhat 

differently than the employer-based plan market. Specifically, while it is uncommon for front-end 

commissions to be charged in 401(k) plans, they are used routinely in retail accounts including IRAs. 

We have urged the Department to complete a full IRA market analysis.

In analyzing the cost of the proposal on true advisory relationships in the IRA market, the 

Department should not assume that most brokers and other financial professionals will be able to 

accept fiduciary status and continue their current compensation structure by using a class exemption. 

The current class exemptions, in light of the Department s restrictive interpretations of them, do not 

provide sufficiently clear relief.

Since 1975, the Department has sought to provide exemptive relief for transactions involving 

the sale of mutual funds to plans and IRAs but the scope of these exemptions has not been entirely 

clear. Concerns about the application of the existing exemptions to mutual fund transactions arise in 

two respects. First, many of the existing class exemptions do not provide sufficient guidance on how 

they apply to mutual fund transactions. For many years, ICI has asked the Department to address 
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mutual fund transactions specifically by carving them out separately in regulations and advisory 

opinions or, if necessary, through more tailored prohibited transaction relief. 1

Second, even where exemptions purport to cover mutual fund transactions, there is a great deal 

of uncertainty on how the exemptions apply, often because of subsequent guidance from the 

Department restricting the reach of these exemptions, or limits on what is covered by the exemption in 

the first place. Below we describe the relevant exemptions and the questions they raise.

We emphasize that while th

current commitment to them may be unclear, the class exemptions as promulgated were intended and 

expected to provide relief for a wide range of services and transactions. Any action the Department 

might take now with respect to the exemptions should make them more, not less, usable. The 

Department should not clarify or revise these exemptions to provide fewer opportunities for firms to 

provide investment advice, particularly as the Department is considering expanding the definition of 

investment advice for fiduciary purposes.

PTE 84-24: PTE 84-24 was intended to provide relief where a broker provides investment 

recommendations and advice, and specifically covers the receipt of sales commissions by the principal 

underwriter. 2 Although the exemption defines principal underwriter to include affiliates, Department 

officials have at times suggested that the exemption might not cover the receipt of a commission by a 

broker affiliated with the principal underwriter.3

It is also unclear how Part III(c) of the exemption, which provides conditional relief for the 

effecting of a plan s purchase of mutual fund shares by the principal underwriter, is satisfied. We read 

the purpose of the exemption to allow a mutual fund firm to sell its own funds, and assure the firm that

various ways the firm might allocate its revenue (investment advisory fees, shareholder servicing, and 

sub-transfer agent fees) will not trip into a prohibited transaction. In a footnote in a 2000 advisory 

opinion addressing a different issue, however, the Department cast doubt on the exemption:

It is the Department s view that PTE 84-24 would not provide relief for any prohibited 

transaction that may arise in connection with any fees or other compensation separate and 

apart from the commission paid to a principal underwriter upon a plan s purchase of 

recommended securities. Thus, PTE 84-24 does not exempt any prohibited transaction arising 

out of transactions involving fees paid to a fiduciary service provider with respect to an advice 

 

1 See Institute Letter from Kathy Ireland to Ivan Strasfeld (Feb. 11, 1993); Institute Letter from Kathy Ireland to Robert 

Doyle (Feb. 11, 1993); Institute Letter from John Canary to Ivan Strasfeld (May 11, 1995); Institute Letter from Russell 

Galer to Ivan Strasfeld (Sept. 19, 1995); Institute Letter from Kathy Ireland to Office of Exemption Determinations (June 

14, 2004).

2 See 47 Fed. Reg. at 14810 (Preamble to PTE 84-24); 42 Fed. Reg. at 32395, 32396 n. 2 (Preamble to PTE 77-9); DOL 

Info. Ltr. to W. Chadwick (Aug. 8, 1980).

3 See Institute Letter from John Canary to Ivan Strasfeld (May 11, 1995).
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program which provides specific/individualized asset allocation recommendations to 

participants based on their responses to questionnaires.4

The footnote seems inconsistent with the exemption (whose terms provide relief from section 406(b)), 

and it has caused a great deal of uncertainty about the scope of exemption. For example, it could be 

read to mean the exemption does not cover investment management fees because the fee paid by a

mutual fund to its investment separate and apart from the commission paid to a 

principal underwriter. The payment of an investment management fee, however, is always the result of 

e of a mutual fund, and notwithstanding this footnote, PTE 84-24 should be read 

to provide the relief it purports to give.5 In addition, we see no public policy reason why the relief 

would be limited to principal underwriters receiving commissions but not to other advice programs 

that are functionally equivalent.

PTE 75-1: PTE 75-1, Part II was established to provide section 406(a) relief for purchases and 

sales of securities in principal transactions between a broker-dealer and a plan and includes a mutual 

fund exemption with relief from section 406(b) for chase and sale by the plan of securities 

issued by an open-end investment company. 6 The exemption from the outset created confusion in the 

industry because its original structure suggested that it only applied to principal transactions, but most 

mutual fund sales exhibit the characteristics of agency transactions. In 2006, the Department revised 

Part II of PTE 75-1 and repositioned the exemption for mutual funds into its own free standing 

exemption. While this served to alleviate some confusion as to whether the sale must be a principal 

transaction, 

Other uncertainties also remain surrounding the use of PTE 75-1. First, in proposing revisions 

to the mutual fund portion of the exemption, the Department questioned whether the exemption had 

any utility, and stated in finalizing the revisions the Department would continue to review the issue.7 

These statements chill usage of the exemption. Second, much like PTE 84-24, the scope of fees covered 

by PTE 75-1 is not entirely clear. While the exemption covers the purchase transaction itself and the 

 

4 Advisory Opinion 2000-15A n.4 (Nov. 15, 2000). Footnote 4 states that the requestor did not ask for an opinion about 

PTE 84-

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It would be an odd result if the exemption provided relief for a commission for distributing a mutual fund but not to the 

investment management fee itself. After all, ERISA section 3(21)(B) protects advisers of mutual funds from concern that 

the purchase of fund shares by an ERISA plan might by itself trigger a prohibited transaction.

6 nal comment letter, we expressed the view that prohibited transaction relief was not necessary at all 

when a broker-dealer sells mutual fund shares to a plan and the only compensation received is a commission. See Institute 

Comment Letter from David Silver to Commissioner of Internal Revenue Service and Office of Employee Benefits Security 

(Aug. 29, 1975). We continue to believe that many transactions involving the sale of mutual funds simply do not require 

relief from section 406(a) or (b).

7 See 69 Fed. Reg. at 23218 (Apr. 28, 2004); 71 Fed. Reg. at 5885 (Feb. 3, 2006) (stating the exemption for mutual fund 

pending further action .
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receipt of sales commissions,8there is uncertainty whether it extends to other types of fee payments to 

brokers in mutual fund transactions, such as shareholder servicing, sub-transfer agent, and revenue 

sharing fees. 

PTE 86-128: PTE 86-128 § II(a) exempts a plan fiduciary s using its authority to cause a plan 

to pay a fee for effecting or executing securities transactions to that person as agent for the This 

exemption clearly provides relief from section 406(b) for the receipt of commissions by brokers that are 

plan fiduciaries for agency transactions. One uncertainty arises because the exemption refers to a plan 

pay a fee, an ambiguous term that possibly could be read to mean that 

only discretionary investment management, and not investment advice, is covered. There is nothing in 

the text of PTE 86-128 nor any other guidance we are aware of that suggests PTE 86-128 is not 

available for non-discretionary investment advice.

9 Nevertheless, because much of the discussion 

regarding PTE 79-1, the predecessor exemption to PTE 86-128, related to investment management, the 

question is not free from doubt.

Much like PTEs 84-24 and 75-1, there is uncertainty also about the fees covered in connection 

with mutual fund transactions. In particular, PTE 86-128 could be read not to cover a fiduciary s 

receipt of fees paid from the mutual fund or its agent rather than directly from the plan because the 

exemption covers a plan fiduciary who is using its authority to cause a plan to pay a fee. (emphasis 

added).10

ERISA Section 408(b)(14): The Pension Protection Act added a statutory exemption for 

investment advice because existing rules and exemptions were not providing sufficient opportunities for 

participants and IRA savers to obtain quality investment advice. Unfortunately, more than four years 

later, the Department still has not issued final guidance.

In early 2009, the Department issued a final rule (now withdrawn) for a class exemption with 

respect to advice to IRAs.11 The class exemption addressed a number of uncertainties regarding the 

statutory language, including the reference to off-model advice and the application to IRAs 

offering access to a wide range of investments and would have provided a clear path for firms to provide 

quality investment advice under strict conditions.

 

8 See 41 Fed. Reg. 56760, 56761 (Dec. 29, 1976) (preamble to proposed PTE 77-9).

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actions and can therefore be liable for the result.

10 Indeed, one court rejected arguments that PTE 86-128 could cover a fiduciary s receipt of fees from a third party in 

connection with a plan s investment transactions. Chao v. Linder, 421 F. Supp. 2d 1129, 1138 (N.D. Ill. 2006) ( In looking 

at the plain language of the exemption it is clear that a covered transaction is one in which a plan itself pays the fees of the 

fiduciary. Defendants neither pointed to nor could we find any indication in the exemption itself, or in the explanation and

history of the exemption, that PTE 86-128 was intended to cover commissions paid by a third party to the fiduciary. )

11 See 74 Fed. Reg. 3822 (Jan. 21, 2009).
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The Department , and very controversial, proposal eliminates the class exemption and 

would include a new condition that suggests that computer models cannot consider historical 

performance in distinguishing among investment options in an asset class.12 The Department also 

suggested it mightembark on a process to determine or define the generally accepted investment 

theories under which plan assets should be invested. An exercise to define generally accepted 

investment theories would have implications far beyond computer models under the PPA exemption.13 

The uncertainty about the scope of section 408(b)(14) makes it very difficult for firms to develop

advisory programs for ERISA plans or IRAs and this frustrates Congress goal of increasing access to 

investment advice to retirement savers.

3. The Department should assure that the exceptions for information related to platform 

investments work.

The proposal includes two exceptions related to platforms of investments offered by 

recordkeepers. While our hearing testimony urged the Department to retain these platform exceptions, 

most of

urged the Department to retain and clarify. We want to reiterate here the importance also of 

maintaining and clarifying the platform exceptions to ensure that recordkeepers can continue to offer a 

range of services not involving impartial investment advice that assist fiduciaries in making 

decisions regarding plan menus.

In our comment letter we provided examples of this assistance, none of which involve a 

recordkeeper undertaking to provide individualized recommendations about what decisions plan 

fiduciaries should make. For example, 

recordkeeper may provide a sample plan line-up to give plan fiduciaries a sense of the overall cost of a 

recordkeeping arrangement and a sense of the funds available o

Recordkeepers also may work with plans they serve to develop objective screens that the recordkeeper 

can run for the plan to help the plan narrow the universe of available funds for initial selection and 

monitor over time the funds fiduciaries select for the menu. They also may provide a sample 

investment policy statement or discuss with a plan how its existing investment policy statement would 

replace a fund on the menu they will often ask the recordkeeper to suggest funds that are reasonably 

similar to the one being removed.

forms are intended to cover these 

types of routine information and assistance that recordkeepers provide. Our members are concerned, 

 

12 See 75 Fed. Reg. 9360 (March 2, 2010).

13 See Institute Comment Letter from Mary Podesta on 2010 Investment Advice Proposed Rule (May 4, 2010), available at 

http://www.dol.gov/ebsa/pdf/1210-AB35-029.pdf. 
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however, that the language is somewhat vague and believe it important the Department either confirm 

that this information and assistance is covered or clarify the language to assure that it is. 

* * * *

The lack of adequate relief provided by existing exemptions bears on the full IRA market 

analysis Department will need to undertake and publish before finalizing any changes to its fiduciary 

definition. In its economic analysis for this new proposal, the Department states that the effect of the 

regulation largely will be that service providers will modify their business practices to ensure that they 

act solely in the interests of their employee benefit plan clients and the plans participants and 

beneficiaries as required by section 404 of ERISA. 14 The Department concludes that costs associated 

with these modified business practices are less than benefits improvement in service value,

although the Department admits it cannot quantify these benefits.

how service providers to plans and IRAs 

would react to the proposal if finalized in its proposed form. Many firms decide from the outset 

whether a service will be offered as a fiduciary service, and if it is not, the firm designs the service (and 

the information and assistance provided with it) so that the firm can be sure it does not cross into 

fiduciary status. These firms will react by scaling back their services. While other firms may opt to 

maintain services the rule recharacterizes as fiduciary and to operate under the revised new rule, the 

foregoing discussion makes plain that 

existing class exemptions contain too much uncertainty to allow clear opportunities to offer fiduciary 

investment advice. The Department needs to revise its analysis to consider the cost to 401(k) and IRA 

savers who will lose access to the information and assistance they receive now to help them make 

investment decisions.

rly and 

properly draw a line between commonplace financial market interactions (which do not trigger 

fiduciary burdens) and advisory relationships (which do). The possible availability of exemptions does 

not relieve the Department of the obligation to make any changes to this long-standing rule clear and 

workable.

Our comment letter details the ways the Department should modify the proposal to ensure it 

captures only true advisory relationships. This includes applying the proposal only to individualized

advice pursuant to a mutual

happen to meet the definition of investment adviser under the Advisers Act or are a fiduciary for other 

purposes, clarifying the exceptions for sellers and platform providers, and applying the exceptions for 

401(k) plans to IRAs. Taken together, these issues and others raised at the hearing will require 

significant changes to the text of the proposed regulation. Because of the importance of getting this 

project right, the Department should seek another round of comments through a reproposal.

 

14 75 Fed. Reg. at 65273. 
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Thank you for the opportunity to supplement the hearing record. Please feel free to contact the 

undersigned at 202.326.5826 (podesta@ici.org) or Michael Hadley at 202.326.5810 

(mhadley@ici.org) with any questions.

Sincerely,

Mary Podesta

Senior Counsel Pension Regulation